Mazda Ford Case Study International Business Essay


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Mazda Ford Case Study International Business Essay

  1. 1. Christos Theophilou George Papageorgiou Strategic Alliances: Learning From Winners In the case study, the authors do not simply attempt to make a list of the relevant theory surrounding strategic alliances, but instead a successful strategic alliance is presented, scrutinized and expanded to be integrated with some insightful literature. We expect that through such an analysis we can gain an appreciation for the key points that enable success and unlock the mystery of why some alliances can result in a winning partnership and if there can be mutual gain from the alliance. This is a much-debated area largely ‘unexplored’ and as such the authors will try to represent an unbiased conclusion, which emerges from the study of the case itself. Although we explore a case in the automobile industry between an American firm and a Japanese firm the arguments and insights can be generalized to include all industries and the whole arena of international alliances. Case Study: Ford and Mazda The Japanese ‘invasion’ in the automobile industry was swift and methodological. Most American firms found it difficult to compete in the small car market as most of their products focused on luxury and style rather than on convenience and price1. The Japanese managed to improve on productivity and quality far beyond what most North American firms had ever achieved. Ford instead of competing head on with the Japanese it tried to use its strategic alliance with Mazda as a source to learn from and eventually make a better product. Mazda on the other hand used its alliance with Ford as the means to access new markets, to learn more about Ford's cost-control practices and to explore the process of launching a major manufacturing facility in a foreign country. This historic collaboration can be used to show the way to other alliances and teach those that follow how to effectively co-operate cross-culturally (1). Ford became interested in Mazda (Toyo Kogyo) in the 1960’s, when Mazda was the third largest automobile company in Japan with a reputation for engineering excellence. Ford began its co-operation with Mazda by buying parts for Ford cars sold in the Asia-Pacific region and by letting Mazda become a supplier for pick up trucks for the US and Canadian markets. By the end of the 60’s they were working together on a number of projects in the Asia-Pacific region. Mazda was basically the supplier of unassembled automotive parts and components, which Ford assembled and sold with Ford badges in various Pacific-rim countries. In the 70’s there was ‘turbulence’ in the operations of both firm, mainly caused by the oil crisis, a fact that affected their relations. In 1979 non-the-less, after some unsuccessful attempts in the past2, Ford reconsidered the advantages of a strategic alliance and attained 25% ownership of Mazda’s equity capital. This move placed the foundations for one of the most successful alliances up to date. 1 After the oil shocks of the 70’s the U.S. car market had lessened demand for cars in particular but also there was a shift in consumer preferences to smaller, more fuel-efficient cars (6). 2 Initial attempts made by Ford where fought of by Mazda and later cries for economic help made by Mazda where ignored by Ford. 1
  2. 2. Christos Theophilou George Papageorgiou From 1979 and onwards, key executives and other key managers of the 2 companies have been meeting regularly to discuss various emerging issues, such as industry and economic trends, strategies for co-operation and specific projects (1). The collaboration after the acquisition included the supply, by Mazda, of all manual and some automatic transaxles for Ford cars and the supply of small cars to the Asia-Pacific region. Mazda was also responsible for establishing the Autorama dealer network, through which Ford sold restyled Mazda cars and later U.S imports, a move that established Ford as the biggest seller of foreign automobiles in Japan3. The collaboration also led up to the creation of the Hermosillo plant, which quickly became not only Ford’s best plant in quality terms and one of its most efficient, but also a model for renovating other facilities (2). The Hermosillo plant was an attempt by Ford to clone the Mazda technology. The body shop and assembly area were modeled after Mazda’s Hiroshima facility while Mazda’s Hofu plant served as a blueprint for the stamping operation. Mazda not only provided ‘directional quotes’ to the various objectives of Ford specifying the technology needed and the estimated costs to meet the goals, but also had the principal responsibility of the design, provided through Japanese suppliers the tools and equipment to the plane and embodied the quality system which it was using (1). In the Hermosillo plant Ford and Mazda learned a whole lot from each other and in addition to that Ford managed to produce its Tracer model for sale in Mexico and the U.S, while Mazda sold kits and parts to Ford and also earned a handsome fee for the technological and technical support supplied. Their initial collaboration on the Hermosillo plant was expanded through other projects. In 1989, they jointly established a project in South Korea where Kia Motors, relying on technical co-operation from Mazda, produced a subcompact car, the Festiva, for sale in the U.S and Taiwan. A reverse relationship than that in the Hermosillo plant was developed in Mazda’s assembly plant in Flat Rock, Michigan. Ford this time provided management inputs on supply and other matters, and Mazda assembled the Ford Probe in the plant (1). The 2 companies have worked jointly on ten current auto models, usually with Mazda contributing key engineering inputs and Ford designing most of the styling. Ford and Mazda’s partnership has proved that a strategic alliance between U.S and Japanese firms can be beneficial to both of the companies’ strategic capabilities (2). Case Study Analysis Partner Selection Like many other alliances the two firms started out with supplier-customer relationship but as a result of high trust that built up throughout the years it develops to a formal alliance. The practical experience gained by working with each other in smaller projects during the 60’s, enabled the firms to experience each other’s cultures and operations and to judge whether they could achieve compatibility of goals, ultimate top and middle management chemistry and compatibility of beliefs. What was clear from the beginning was that each firm had a comparative advantage in the field where the other 3 There were many barriers for imports into the Japanese markets and the local government to result in protectionism used ‘Infant-Industry’ arguments. 2
  3. 3. Christos Theophilou George Papageorgiou lacked but non-the-less valued dearly. Mazda had a reputation for engineering excellence but was relatively inexperienced in how to expand in other markets4 and required a larger market base for its products, while Ford although operating plants in many countries, was experiencing trouble in coping with the new and more efficient production technologies of the Japanese firms5. An important consideration that led to their co-operation was also the good reputation of the two firms, which made it unlikely for opportunistic behaviour on behalf of one of the two firms. Although history has proven them to be perfect for each other with both companies willing to give a lot of effort to the success of the alliance, this in most cases can only be predicted through rigorous partner selection. Hill, 2002, argues that the partner selection process is one that can either set the foundations for an alliance to succeed or doom it to fail. They continue to suggest that before conducting an alliance, research most be undertaken so that issues like the compatibility of two firms and whether the two firms could both gain from a strategic can be tackled. Elmuti and Kathawala, 2001, clearly state, “no business relationship is guaranteed, but given enough information, it has a more solid foundation upon which to build”. Building Of Trust The next step for the two firms was an attempt to build trust between each firm’s top executives but also between all employees. The Ford Cooperation in 1979 made a $130 million dollar investment by purchasing Mazda’s equity, a move that was respected by Mazda, being a timely payment in view of its financial woes (1). The move by Ford showed commitment on its part and a willingness to have a healthy partnership with Mazda. We can also argue that it filtered out all possibilities of opportunistic behaviour on Ford’s behalf. Mazda’s commitment and its desire to co-operate unselfishly with Ford was also proven in the collaboration on the Hermosillo plant were Mazda offered much of its management techniques and its way of doing things to Ford’s discretion. Mazda even allowed the Ford team to use video recordings of Mazda’s daily operations, so that they can illustrate practical examples to their employees. We can see from Mazda’s attitude that they had, if at all, very little safeguards to prevent opportunism on Fords behalf, which although very risky and arguably too dangerous in the specific case it paid of by enhancing the sense of trust. A lesson that both companies learned and respected early on, was the insight that each has distinctive contributions to make and that neither side should expect or attempt to dominate the relationship (1). The importance of communication and co-operation transmitted The senior management of both firms was making continuous attempts to convince all layers of the operation the importance of the alliance. It is not a coincidence that top and middle managers of the two firms, were meeting regularly to discuss various issues emerging. To also strengthen the trust and the co-operation, both management representatives would arrange to spent ‘quality’ time together after meetings so that they could discuss more informally and solve any disputes that may have risen (1). The two companies, during a specific project, even established a joint employee training program, not only to be able to split up the training costs between them and achieve a more 4 It desired to establish itself overseas and minimize the risks of developing plants in other countries. 5 The Japanese and other Pacific-Rim countries where rapidly stealing market share from U.S companies. 3
  4. 4. Christos Theophilou George Papageorgiou thorough education but also to establish and transmit a feeling of joint culture. It is argued that without such an effective communication an alliance will inevitably dissolve because of doubt and mistrust which are symptoms of a relationship that does not manifest good communication practices (4). We can also argue that to achieve such effective communication and the co-operation of the firms on all levels, senior management must be responsible of transmitting the message downwards. Similarity of philosophies Prior to the 1980’s there was a large gap between the philosophies of the two firms6. After the oil crisis of the 70’s though and the reported losses of the early 80’s, Ford was aware that to survive and remain a profitable company it must try to restructure some of its operations and to redefine its goals and philosophies. Although the alliance with Mazda was not its only guide to achieving this objective, we can identify in Ford’s case a clear appreciation of Mazda’s philosophies and management techniques and a desire to learn more about them and to implement them in to their own operation. There is a clear distinction between Ford’s behaviour and the behaviour of other North American companies operating in alliances with firms from the Asian-Pacific rim7. In most cases, such companies did not show any interest on philosophies and on the employee management techniques of their allies but instead only on production techniques. In contrast Japanese countries were always interested to learn all about their allies operation from the most prestigious department to the most ill performing one. I believe that this is one of the major reasons, which brought forward the notion that Japanese companies have on average gained more strategically from an alliance rather than their U.S counterparts. The redefinition of Ford’s missions, values and guiding principles8 was not easy to achieve but had a crucial role in the success of their alliance with Mazda. Ford initially used its alliance to send managers in Japan and to observe workers and managers in the automobile plant of their ally Mazda and a few other plants of Toyota, Nissan and Honda. An insight gained by Ford’s management was that, higher levels of automation where not the reason that superiority of the Japanese automakers was achieved, but rather it was the people that made the difference (2). As a result, Ford started a global attempt to revise its commitment to quality and the empowerment of its employee through the guidance of the quality control guru, Dr. Deming. Its new philosophies where aimed in putting people before products and it also established a Centre for the purpose to train its executives to think and act internationally. This restructure of Ford’s way of thinking aligned its philosophies with the Mazda philosophies and allowed the two firms to establish an even greater understanding between each other. The importance of this restructuring and redefinition of Ford cannot be stressed enough as it allowed it not only to form a successful alliance with Mazda but also to maintain its position as a leading automobile company. First, as previously mentioned it 6 More generally speaking we can find differences in philosophy between any two firms from different backgrounds. This is particularly true and even more troublesome between Asian-pacific countries and the rest of the world. 7 This can also be generalized to include companies from other countries as well. 8 By the end of 1983, Ford introduced the company “Mission, Values and Guiding Principles”, which put the priority of people before products and profits. 4
  5. 5. Christos Theophilou George Papageorgiou aligned the philosophies of the two firms. Elmuti and Kathawala, 2001, state, “Differences in corporate partners’ personalities, like differences in spousal personalities, can often lead to tragic results”. A possible outcome of different philosophy is a cultural clash where two firms have problems communicating either with differing languages, egos, and chauvinism or more importantly they have completely different philosophies and attitudes in the way they operate their business. The new management center also reinforced Ford’s comparative advantage, by maintaining an international vision within its management ranks. Mazda is operating under the Japanese approach of considering employee interests ahead of shareholders’ interests and if Ford did not shift its policies to attain this insight, there would unavoidably be serious conflict over investment and dividend policies (5). Goal Compatibility Ford and Mazda were both struggling during the 70’s and early 80’s and found support for their problems on each other. In the automobile industry companies seek to find partners to share the excessive costs of developing a new model, to gain access to new markets and technologies and to achieve a greater market base to cover their costs (2). Besides the above general reasons, there were also company specific reasons that made an alliance necessary for both firms. Mazda was facing the desire to expand overseas9 without neglecting its home market but Ford was facing a new threat in its home market through tough competition and needed to reinforce its leading position. This threat was also developing in all the overseas markets and Ford needed to implement new models to enhance its market base. The two companies had very separate comparative advantages and they needed each other’s contribution so that they could perform a better operation in absolute terms. Clear understanding of what value each partner will bring to the alliance is the foundation on which trust and relationships are built for future success (5). We can conclude from the previous summary that Mazda and Ford ‘completed’ each other and they both had very similar visions. To reinforce our argument, in 1988 chairman of Mazda, Kenichi Yamamoto, demonstrates the goal compatibility of the two firms through the following statement, “When two independent companies try to work together there are often small disagreements on the working staff level because they tend to make judgments in their small areas of responsibility and in terms of immediate results. But between Ford and Mazda there exists a feeling of trust on the CEO level and the people on this level have always had an overall strategic viewpoint which rises above small differences and which has produced results mutually beneficial to both partners” (1). A lot of literature focuses on the importance of clearly defined, shared goals and objectives and many consider it to be one of the must important, relationship factors in an alliance. Vyas et al, 1995, argue that without such compatibility of goals, the alliance partners may pull in different directions bringing about the diminish of their alliance. Ernst and Stern, 1996, expect the top management of both operations to articulate a clear link between where it expects the industry’s future profit pools will be, how to capture a larger share of those, and where, if at all, alliances fit in that plan (4). Elmuti and 9 Although not an immediate issue for Mazda, Reagan administration was able to “persuade” the Japanese government to restrict “voluntarily” exports to the United States (6). 5
  6. 6. Christos Theophilou George Papageorgiou Kathawala, 2001, stress the importance of alliances being aligned with the company strategy, by warning that merging of separate corporate cultures in which the parent firms may have different, even ultimately conflicting, strategic intents can be difficult and anything but smooth. To confirm the above arguments a McKinsey study found that 50% of alliances failures are due to poor strategy. Program management group The co-operation with Mazda also launched the use, for the first time by Ford, of Program management groups (1). The importance of these groups lies not in their development but in the functions they were allocated to do, the determination and commitment illustrated in their creation and the results they managed to achieve. These groups were specifically defined as responsible for each individual program’s administration, the contract negotiations with Mazda, which enabled the project’s financial objectives and strategic goals to be identified and in coordinating the work in Ford’s product development, manufacturing and supply activities. They were developed having in mind that planning, commitment and agreement are essential to the success of any relationship. They also facilitated the alignment of the strategic goals of the two firms through negotiations between each company’s responsible management. The clear specification of each company’s role in the strategy was also determined in advance. The program management group is living proof of the commitment of resources by Ford. Adequate managerial resources10 where thus provided in addition to capital, production, marketing and labour resources so that the full potential of the alliance was achieved. Mazda learned to only communicate with such groups and was itself operating using similar managerial groups. Program management groups also ensured the co-ordination between the two firms and resolved any dispute that may have risen. The road is never easy The strategic alliance was not always as successful as it now seems and there were problems along the way. The first major project undertaken by the two firms was the Hermosillo plant but neither Ford nor Mazda met their profit objectives for the original Tracer model at Hermosillo. Instead of criticizing each other the firms were content with the first trial of the relationship and stemmed the project as a relatively successful step in their developing relationship. The two firms indeed worked even harder on later models and the Hermosillo plant was perhaps Ford’s most quality efficient plant up to date. The fact that they did not achieve their goal was tolerated and it was expected that it was only a learning stage in their alliance and new insights could be learned. It is also a fact that fundamental differences remain in the way the two companies view their relationship, although as long as there is good communications, such differences can be resolved. According to a Ford manager, “It is Ford’s posture that each project should stand on its own feet and be independently viable. Mazda management, on the other hand, seems more willing to give on one project in return for a Ford concession on another. Such differences are being narrowed over time.” Additional success factors 10 Both firms appointed some of their most capable managers in these positions. 6
  7. 7. Christos Theophilou George Papageorgiou The basic success of the two companies is not based on the contribution of one firm more than the other but on equal effort and commitment by both firms. They operated an alliance based on communication and co-operation rather than one firm exercising power over the other. The success of the co-operation was not based on a rigid hierarchy but instead was heavily dependent on each firm’s negotiation skills. Both firms had equal gains from the alliance not only because of equal risks taken but also because they were both willing to learn from their alliance partner. They viewed their alliance as a desirable state and were highly motivated in making it work rather than merely viewing it as the only alternative. Both companies invested the same amount of resources, the same amount of effort and the same amount of commitment to the alliance and as such they were reworded. Both partners were aware that a specific alliance project would be more efficient, more effective and as a result much more competitive compared to each partner performing the same project individually. Mazda and Ford desired for their alliance to work and were determined to make it work. References: 7
  8. 8. Christos Theophilou George Papageorgiou 1. Haigh R.W., 1992, “Building a strategic alliance”, Columbia Journal of World Business, Spring92, Vol. 27 Issue 1, 59-74. 2. Chan P.S. and Wong A., 1994, “Global Strategic Alliances and Organizational Learning”, Leadership & Organization Development Journal, Vol. 15 No. 4, 31-36. 3. Hill C., 2000, “International Business: Competing in the global marketplace”, 3rd Edition, London: Mcgraw Hill. 4. Elmuti D. and Kathawala Y., 2001, “An Overview of Strategic Alliances”, Management Decision 39/3, 205-217. 5. Vyas N.M., Shelburn W.L. and Rogers D.C., 1996, “An analysis of strategic alliances: forms, functions and framework”, Journal of Business & Industrial Marketing, Vol. 10, No. 3, 47-60 6. Ethier J.W., 1995, “Modern International Economics”, 3rd Edition, London: W.W. Norton & Company. 7. Kalmbach C.Jr. and Roussel C., “Dispelling the myths of alliances”, Accenture publications, special99over_specialed.xml, 16 November, 1-8 8. Accunture publications, “Mergers, Acquisitions and alliances”, it=enWeb&xd=servicesmergersma_home.xml 9. Morrison M. and Mezentseff L, 1997, “Learning Alliances - A New Dimension of Strategic Alliances”, Management Decision 35/5, 351-357. 10. Drago W.A., 1997, “When Strategic Alliances Make Sense”, Industrial Management and Data Systems 97/2, 53-57. 8